Go away in May, come back in June

The old adage was never really true in the first place

By

DavidKudla

GRAND BLANC, Mich. (MarketWatch) — “Sell in May and go away” has been a familiar adage to investors for decades. The phrase is a pithy and poetic way to help make sense of the complicated global markets, and distill it into a simple-to-apply nugget. Never mind that the real-world track record for this market-timing tactic is mediocre at best.

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In the last 50 years, selling stocks at the beginning of May would have avoided a loss (between the beginning of May and the end of October) just 38% of the time, using the S&P 500 as a proxy. In other words, there’s a two-thirds chance that one pays an opportunity cost by failing to remain fully invested through the May to October period.

So in 2012, we entered May, and the S&P 500 proceeded to drop about 6% in the first three weeks. It means that “Sell in May and go away” will work this year, right? Actually, the weak market had nothing to do with old clichés coming true. Stocks had rallied strongly in the first quarter of the year in response to promising economic data and solid corporate revenue and earnings, while the uncertainties and risks from Europe dropped off of the front page.

In May, elections in France and in Greece fueled a new round of speculation as to the future of the euro zone. Keep in mind that the outcome of these elections was not a surprise and did little to change the fundamental problems in Europe. Analysts have been crunching the numbers and assessing worst-case scenarios for more than two years now. At the same time, it’s fair to say that the perceived uncertainties are rising, and the debt crisis has snowballed into something of a self-fulfilling prophecy. Once unthinkable speculation that Greece would exit the EU, giving up euros for drachmas, is now turning into a real probability.

As a result, the market discounted this additional risk and stocks throughout the world corrected. Therefore, last month’s main concern – that the market seemed excessively euphoric and overbought – is no longer a primary factor in decision making. So where are we now?

Some pundits will look at the market environment heading into June as a continuation of May, and will advocate playing defense, but we don’t believe that the prevailing trend in any market environment is particularly long lasting. In the information age, market driving forces tend to come up and play out in the course of days or weeks, rather than months or years as may have been the case in the past.

As a result, we believe the recent market direction represents an opportunity to either establish new positions or add to existing positions, particularly in the cyclical and economically sensitive areas that have sold off recently. It doesn’t mean we can predict with certainty the short-term direction of the market, but certainly there are some better buying opportunities available today than there were a month ago.

As for the best market plays heading into June, it’s a worthwhile exercise to look for good companies that have been beaten down lately. Trimble Navigation
TRMB, -0.90%
uses GPS (Global Positioning System) and other positioning technologies to enhance productivity. Its most notable applications are in construction projects (surveying, site preparation, and building) and agricultural (so farmers know where to spray, plant, and harvest). It also has a smaller but faster-growing mobile solutions segment (software to track and monitor vehicles in a mobile fleet). The company continues to show strong momentum with revenue and earnings, and with its shares down 14% in the first three weeks of May, buyers have a worthwhile entry point.

BASF
BASFY, +1.61%
is a global powerhouse in basic and specialty chemicals and plastics, with commanding shares in a diverse list of industries including agricultural chemicals, automotive, paints and coatings, and detergents and cleaners. Its shares have recently come down as part of a broad-based selloff in companies that fall within the cyclical category, as the market speculates on the prospects for a global economic downturn. Negative headlines notwithstanding, the latest revenue and earnings growth numbers for this company have been steady and improving.

Both of these companies give investors, that may have sold in May and gone away, a good opportunity to return to stocks.

David Kudla is CEO and Chief Investment Strategist of Mainstay Capital Management, a fee-only, independent, Registered Investment Advisor. More information about his firm can be found at www.mainstaycapital.com.

Disclosure: Clients and employees of Mainstay Capital Management may hold the securities mentioned in this article in their investment portfolios. The securities mentioned may not be suitable for some investors, based on their tolerance for risk or their investment time horizon.

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